While many attribute domestic prosperity in the past two decades to the economic leadership of former Presidents Reagan and Clinton, when historians look back on this era, they will no doubt chalk-up the long period of stable inflation, sustained GDP growth, and lower taxes to one man: Alan Greenspan. Since joining the Fed in 1987 and up until his recent departure earlier this year, Greenspan conducted an economic symphony that continually brought our economy in for a smooth landing, despite near continuous global and regional turbulence throughout the period.
Consider how Greenspan’s policies played such a critical role in the economic recovery following 9/11. Even before that now infamous day, the domestic economy was starting to hit the skids. Greenspan and the Fed had responded by lowering the Federal funds rate—the one interest rate which the central bank actually controls—in the months leading up to the tragedy. But less than a week following 9/11, Greenspan and the Fed lowered rates further to avert an economic disaster. And this trend of rate decreases would continue for nearly two years, when the Federal funds rate hit a low of 1% in 2003.
This quick and sustained movement effectively saved what was a fragile and weakened economy. Despite the falling dollar—a reflection, in part, on the world view of the economic health of the U.S. and our currency―low interest rates helped to fuel a near unprecedented period of business and personal borrowing in the U.S., saving our economy. While it is unlikely that future generations will ever enjoy: 0% financing again on everything from automobiles to refrigerators, it was Greenspan’s timely actions that would spur borrowing and consumption when we needed it most. For manufacturers, Greenspan’s policy made it possible to borrow aggressively, funding growth and investment. At the same time, thanks to a weak dollar relative to European and Asian currencies, U.S. manufacturing exports became more competitive on the world stage (despite a massive rise in offshoring and outsourcing).
Now that Greenspan is gone and Ben Bernanke is in charge of the Fed, many question what policy the Central Bank will take to monetary policy going forward given its new leadership. Certainly, the balancing act that Greenspan had to conduct throughout much of his tenure will continue, given the volatile nature of the global economic, political, and military landscape. In many ways, the coming years will present a new level of economic risk for our economy.
If we were to lake out our economic crystal ball and look forward, we would most likely predict that the tightrope Bernanke is going to walk will only get thinner in the coming years. Consider the wild ride of energy, prices in the past twelve months and their impact on inflation. If this continues―and all we need for this to happen is another Katrina or the situations.in either Iran and Venezuela to deteriorate—with the specter of inflation from rising energy costs, the Fed might be forced to cool lending and monetary supply by continuing to raise rates.
For manufacturers, a continued rise in interest rates would bring a higher cost of capital—not to mention rising material, transportation, and logistics costs as a result of higher energy prices. Of course this is just one potential, scenario, but as domestic manufacturers think through their growth strategies in the coming years, it will become increasingly critical to focus on the bottom line, reducing costs, and as important, taking as much working capital (e.g. inventory reduction) out of the business as possible.